The Circle Game was a 1968 album put out by old New Hampshire folkie Tom Rush. Tom still tours around this neighborhood and can occasionally be seen at the Bull Run in Shirley, Mass. The title tune was written by Joni Mitchell and has a line in it that aptly describes reflecting on the New Year.
We're captive on the carousel of time, We can't return we can only look behind, From where we came, And go round and round and round, In the circle game .
In the spirit of looking behind and prior to any guesses for 2009, I thought I might look at last year's predictions and see what kind of success I enjoyed for 2008. It actually turned out to be a pretty good year as a prognosticator although quite frankly it didn't take much talent to score well on some of the less than bold guesses I made. http://philgallagher.blogspot.com/2007/12/who-knows-where-time-goes.html
We did go into recession and the Fed was behind the curve but they caught up rather rapidly. By December they had cut the Fed Funds rate to all time lows. These actions were ratified by the bond market in general as the thirty year treasury dropped to a stunningly historic low of 2.64% and the ten year was at 2.20%.
Oil prices did fall dramatically this year and gas did fall below 2 dollars. Troop reductions did begin in Iraq and General Patreus continued to be successful in reducing violence in the country. You can tell just how successful he has been by the lack of coverage by the news media. The Globe and the New York Times won't report any thing positive on Iraq until Obama takes office, then they will trumpet his diplomatic skills.
I missed on the Patriots winning the Super Bowl and the Red Sox winning the World Series but I did have the Celtics winning the NBA championship. I was close on the other two since the Patriots lost in the Super Bowl and the Sox were within a couple of runs in game 7 of the league championship from going to the World Series.
I almost completely wiffed on the presidential election having only John McCain on the ticket for the two parties and did not have Obama on the radar screen as the winner.
Legalized gambling was not approved, marijuana was decriminalized and the income tax was not repealed. I was right on all three except the margin of defeat on the income tax was much larger than I anticipated.
Global warming is starting to lose a little bit of its cache but Hollywood still continued the theme. A great science fiction story, The Day the Earth Stood Still was ruined by having Klatu come to destroy humans because of our bad carbon footprint.
Pakistan didn't have elections but Musharaff is deposed and the tribal lands are coming under increasing attacks. Whitey Bulger wasn't caught and gold did come down in price.
On the wrong side I had Amyn Al Swahiri and Osama Bin Laden being caught or killed. Swahiri is still alive but I am betting Osama has gone to paradise.
So here goes some guesses for 2009.
1. The stock market will begin to recover sometime after the second quarter. Corporate earnings will be disastrous and won't begin to turn around until the third quarter. The Dow will finish over 11,000 in 2009.
2. The world will turn to the U.S. to solve the pirate problem.
3. Castro will pass away and Obama will loosen the foolish U.S. embargo on Cuba.
4. The news will get better. Things won't be much better in general but the news reports will be better because Bush will be gone and the media will want to give Obama every break they can.
5. Mahmoud Ahdmadinejad will lose re-election in Iran. Declining oil prices will bring great pressure on the clerics in Iran.
6. There will be social unrest in China and demonstrations over rising unemployment.
7. The Celtics will repeat as NBA champions and the Yankees will have an enormous payroll and will not win the World Series.
8. Caroline Kennedy will continue on her speaking tour in pursuit of the senate seat in New York. Each time she opens her mouth she will sound more and more like a California freshman valley girl and she will not get the appointment.
9. The state budget deficit will approach 2 billion in Massachusetts, local aid will be cut and we will see an increase in taxes and cuts in state and municipal employees.
10.,The Boston Globe will be sold for a very small price and its strangle hold on opinion in the commonwealth and its influence in general will continue to weaken.
11. I won't lose ten pounds.
Happy New Year!
Wednesday, December 31, 2008
Thursday, December 25, 2008
How Much for the Globe?
It is reported by The Wall Street Journal last night that the New York Times will be looking to liquidate assets in order to meet debt obligations. A couple of those assets are very important to our region.
The Times joined John Henry in a consortium that bought the Red Sox. Of the 700 million dollar purchase price, the Times reportedly put up 75 million dollars in 2002 for nearly 18% of the team, the park and the sports network. It is reported that the current value of the stake may be as much as 166 million.
Given the condition of the economy it may be a difficult task to get that kind of money. It is made all the more difficult because the Times will be viewed as a distressed seller. They have some where in the vicinity of 400 million dollars in bonds that are maturing near the middle of the year and the closer they get to that date the harder negotiations are going to become.
The sale of the Red Sox will have little or no effect on the region and none on the Sox. Minority partners come and go with little fanfare and no impact on the controlling interests in a company. The Times has another interest however, that has a lot to do with what goes on around here or more accurately, what gets reported on what goes on around here.
That interest is the complete ownership of the Boston Globe. In what was an epic blunder, the Times purchased the Globe in 1993 for what now seems to be an idiotic price of 1.1 billion dollars. Over the past 15 years the paper has dropped in value by approximately 80 million dollars a year and is now said to be worth about 20 million dollars according to published comments from Barclay's.
The Times apparently had a chance to dump this mistake back in October of 2006 when it was reported that former General Electric CEO, Jack Welch was interested in acquiring the paper for between 500 and 600 million dollars. Jack is counting his lucky stars that he was rebuffed.
There are many different reasons for the continued demise of the Times. Certainly the rise of the Internet as an advertising vehicle as well as a free source of a variety of information has significantly hurt the media business.
The reverse Midas touch of Arthur "Pinch" Sulzberger Jr. should not be overlooked. Almost every business decision that Pinch has made has gone to Hell in a hand basket. Bad business decisions plus a declining reputation for accuracy and a blatant tilt to the Left has turned the Times into an issuer of junk bonds. Since his rise to the top of the Times management, Pinch has watched the value of the company drop from approximately $7.5 billion down to today's market cap of about 900 million dollars.
What it probably means is that sooner than later the Boston Globe will have a new owner. With any luck a new owner will bring a house cleaning the paper so desperately needs.
The Times joined John Henry in a consortium that bought the Red Sox. Of the 700 million dollar purchase price, the Times reportedly put up 75 million dollars in 2002 for nearly 18% of the team, the park and the sports network. It is reported that the current value of the stake may be as much as 166 million.
Given the condition of the economy it may be a difficult task to get that kind of money. It is made all the more difficult because the Times will be viewed as a distressed seller. They have some where in the vicinity of 400 million dollars in bonds that are maturing near the middle of the year and the closer they get to that date the harder negotiations are going to become.
The sale of the Red Sox will have little or no effect on the region and none on the Sox. Minority partners come and go with little fanfare and no impact on the controlling interests in a company. The Times has another interest however, that has a lot to do with what goes on around here or more accurately, what gets reported on what goes on around here.
That interest is the complete ownership of the Boston Globe. In what was an epic blunder, the Times purchased the Globe in 1993 for what now seems to be an idiotic price of 1.1 billion dollars. Over the past 15 years the paper has dropped in value by approximately 80 million dollars a year and is now said to be worth about 20 million dollars according to published comments from Barclay's.
The Times apparently had a chance to dump this mistake back in October of 2006 when it was reported that former General Electric CEO, Jack Welch was interested in acquiring the paper for between 500 and 600 million dollars. Jack is counting his lucky stars that he was rebuffed.
There are many different reasons for the continued demise of the Times. Certainly the rise of the Internet as an advertising vehicle as well as a free source of a variety of information has significantly hurt the media business.
The reverse Midas touch of Arthur "Pinch" Sulzberger Jr. should not be overlooked. Almost every business decision that Pinch has made has gone to Hell in a hand basket. Bad business decisions plus a declining reputation for accuracy and a blatant tilt to the Left has turned the Times into an issuer of junk bonds. Since his rise to the top of the Times management, Pinch has watched the value of the company drop from approximately $7.5 billion down to today's market cap of about 900 million dollars.
What it probably means is that sooner than later the Boston Globe will have a new owner. With any luck a new owner will bring a house cleaning the paper so desperately needs.
Saturday, December 20, 2008
Help with a Referendum?
At the request of 7 town meeting members and perhaps because they have the authority to conduct discussions whenever they wish to, the selectmen listened to a plea by Patriot Partners last week. The essence of the pitch is to conduct a town wide referendum on the issue of the sale of the Land Locked Land. More plainly was the question Patriot Partners wants asked. Specifically they want the question to be about selling the land to them. In fact, the attorney for the group boldly offered to "help the selectmen write the referendum" question and help to get "the facts out."
This was met with a good deal of skepticism. The reason the group is pushing the idea is because they are working within a limited frame. The option that they hold on the property extends approximately to May of 2010 and without action by the board of selectmen to extend that option it would expire worthless on that date.
The odds of an extension seem remote for various reasons. If the town did pass a referendum that expressed an interest in selling the property then a couple of obvious conditions would need to be met. First and foremost is timing. Why would any seller that is not in need of de-leveraging or raising capital sell its biggest asset in the worst economy in the last 40 years? We are not distressed, we have money in the bank. Second, why would we deal with only one potential buyer?
There is a certain irony to the claims of the developer. The only reason they hold the option of right of first refusal is because of the bankruptcy of the company that originally made such bold development plans. Who can forget Kerry Hunnewell of Cadillac Fairview standing before the townsfolk during the eminent domain proceedings proclaiming the need for 2 million square feet of high-end office space and amenities for the burgeoning computer industry? The town didn't buy into the grandiose plan and subsequently concluded the plan to take the property by eminent domain.
After the consortium of landowners sued over the taking value and won a judgement, a settlement was reached. In that settlement was the option agreement. This option was provided to them as an inducement to reduce the settlement price. The consortium felt that the town was taking the property perhaps to flip it to some favored group who would then do a deal. This of course was not the plan and therefore offering the option was of little consequence if it helped reach a deal. The town never considered this as a speculative item that would be sold over the years to someone to gain a competitive advantage.
Shortly after that two things occurred similar to the economy we are experiencing today and proved the town's doubts about Cadillac Fairview dead right. The S&L crisis came about because of a tremendous glut of real estate and eventually resulted in over 700 banks in the country going out of business. So to did Cadillac Fairview.
Don't these plans have a similar hollow ring to them? Life sciences is a nascent business with no space in town that can fit that need says the proponent's attorney claiming that this project would not compete with our existing excess inventory. There is a liquidity crisis throughout the world with financial giants in tatters yet only the option holder can pull off a deal worth multiple tens of millions of dollars? Don't worry about the price they say, "we are not looking for a discount." A more suitable approach might be to hand the town a ten or twenty million dollar letter of credit and then very humbly ask the town how much we want.
Additionally, the option already has a purchase price written in it. On page 3 item 6 it says the following: If this option is exercised , the agreed purchase price for the premises is $8,885,143.56, to be adjusted by the increase (or decrease), if any, in the Consumer Price Index for All Urban Consumers, Boston, Ma, All items (1967:100), issued by the United States Department of Labor, Bureau of Statistics, for the period from the date of this agreement to the date of the delivery of the deed.
If that number is 3% annually over the past 20 years then the purchase price would be roughly $16,047,556. That number would not be reason enough to even take a phone call.
In my view a referendum is a good idea. It would provide clarity to the board and potentially save a lot of work and anxiety over the land. The question should be a very simple one, Do you want to sell the Land Locked Land? Then let's have a full blown political battle. The developers will freely spend money trying to win votes but so to will a motivated opposition.
The first thing the opposition will do is challenge the proponents to a debate. How will they fair in an open forum in which pie in the sky assertions can be refuted with existing facts? Or when current statements are compared with recent developments that have not met expectations?
I believe that in the final analysis when all the real facts are exposed, the voters will choose to vote down any suggestion of selling this parcel.
There is no economic advantage to selling the property and this can be easily proven with a pencil and piece of paper. More importantly is the community aspect of the decision. The tax payers who have lived here before us have left a marvelous legacy. They have acquired parks and cemeteries and schools and a reservoir and the Great Meadow. Our municipal buildings and properties are all in place to serve the community far into the future.
Is our mission as the latest residents, to sell off irreplaceable assets because we are to cheap to pay our taxes? Do we think that turning the entire town into asphalt and concrete will improve our quality of life? Can't something be saved for the future?
This was met with a good deal of skepticism. The reason the group is pushing the idea is because they are working within a limited frame. The option that they hold on the property extends approximately to May of 2010 and without action by the board of selectmen to extend that option it would expire worthless on that date.
The odds of an extension seem remote for various reasons. If the town did pass a referendum that expressed an interest in selling the property then a couple of obvious conditions would need to be met. First and foremost is timing. Why would any seller that is not in need of de-leveraging or raising capital sell its biggest asset in the worst economy in the last 40 years? We are not distressed, we have money in the bank. Second, why would we deal with only one potential buyer?
There is a certain irony to the claims of the developer. The only reason they hold the option of right of first refusal is because of the bankruptcy of the company that originally made such bold development plans. Who can forget Kerry Hunnewell of Cadillac Fairview standing before the townsfolk during the eminent domain proceedings proclaiming the need for 2 million square feet of high-end office space and amenities for the burgeoning computer industry? The town didn't buy into the grandiose plan and subsequently concluded the plan to take the property by eminent domain.
After the consortium of landowners sued over the taking value and won a judgement, a settlement was reached. In that settlement was the option agreement. This option was provided to them as an inducement to reduce the settlement price. The consortium felt that the town was taking the property perhaps to flip it to some favored group who would then do a deal. This of course was not the plan and therefore offering the option was of little consequence if it helped reach a deal. The town never considered this as a speculative item that would be sold over the years to someone to gain a competitive advantage.
Shortly after that two things occurred similar to the economy we are experiencing today and proved the town's doubts about Cadillac Fairview dead right. The S&L crisis came about because of a tremendous glut of real estate and eventually resulted in over 700 banks in the country going out of business. So to did Cadillac Fairview.
Don't these plans have a similar hollow ring to them? Life sciences is a nascent business with no space in town that can fit that need says the proponent's attorney claiming that this project would not compete with our existing excess inventory. There is a liquidity crisis throughout the world with financial giants in tatters yet only the option holder can pull off a deal worth multiple tens of millions of dollars? Don't worry about the price they say, "we are not looking for a discount." A more suitable approach might be to hand the town a ten or twenty million dollar letter of credit and then very humbly ask the town how much we want.
Additionally, the option already has a purchase price written in it. On page 3 item 6 it says the following: If this option is exercised , the agreed purchase price for the premises is $8,885,143.56, to be adjusted by the increase (or decrease), if any, in the Consumer Price Index for All Urban Consumers, Boston, Ma, All items (1967:100), issued by the United States Department of Labor, Bureau of Statistics, for the period from the date of this agreement to the date of the delivery of the deed.
If that number is 3% annually over the past 20 years then the purchase price would be roughly $16,047,556. That number would not be reason enough to even take a phone call.
In my view a referendum is a good idea. It would provide clarity to the board and potentially save a lot of work and anxiety over the land. The question should be a very simple one, Do you want to sell the Land Locked Land? Then let's have a full blown political battle. The developers will freely spend money trying to win votes but so to will a motivated opposition.
The first thing the opposition will do is challenge the proponents to a debate. How will they fair in an open forum in which pie in the sky assertions can be refuted with existing facts? Or when current statements are compared with recent developments that have not met expectations?
I believe that in the final analysis when all the real facts are exposed, the voters will choose to vote down any suggestion of selling this parcel.
There is no economic advantage to selling the property and this can be easily proven with a pencil and piece of paper. More importantly is the community aspect of the decision. The tax payers who have lived here before us have left a marvelous legacy. They have acquired parks and cemeteries and schools and a reservoir and the Great Meadow. Our municipal buildings and properties are all in place to serve the community far into the future.
Is our mission as the latest residents, to sell off irreplaceable assets because we are to cheap to pay our taxes? Do we think that turning the entire town into asphalt and concrete will improve our quality of life? Can't something be saved for the future?
Sunday, December 14, 2008
Probably Going to Get Worse Before it Gets Better
Over the weekend the finishing touches will be put into place for the auto industry to gain access to the government TARP funds. The failure of congress to come up with a plan forces the administration to take these steps. After all, if we can spend 80 billion on just one company AIG, why can't we spend 15 billion on the working stiff in Detroit? The argument that the auto workers are over paid pales in comparison to some of the Wall Street and Fannie Mae abuses.
Let’s review some of the major events in our control and out of our control that have led us here.
The first major event contributing to our problem is the passage of Gramm Leach Blilely Act in 1999. This repealed the 1933 Depression era Glass Steagull act which had erected a wall between the lending of money and the investing or leverage of money. This came on the heels of the elimination of interstate banking restrictions in 1997.
The first activities post passage was the consolidation of banking, brokerage and insurance. This was illustrated most prominently by the combination of Citibank, Travelers insurance, Smith Barney and Saloman Brothers.
The next significant event was historically low interest rates. At the end of the century, rates stood at 6.25% and began to come down as the Fed was dealing with the bursting of the internet bubble. At the time of the attack on New York, rates stood at 3%. Six days after the attack on the towers the Fed cut 50 basis points and continued to cut until November of 2002 with rates hitting post WW2 lows of .75%.
What followed was a natural reaction to cheap money. Huge amounts of debt were issued throughout the US economy. Home owners increased credit card debt and accessed equity in their home, nonprofits went on building sprees, big business and municipalities floated bond issues. The states and federal government did as well.
A combination of cheap money and new Wall Street capital being available to the housing market spurred a real estate and housing boom not seen since 1990. Traditional lending criteria were now replaced by such things as structured investment vehicles (SIVS) namely collateralized debt obligations (CDO’s). Because of very low interest rates, the fixed income investment community was yield starved. Wall Street recognized this and began bundling mortgages into securities and selling them in tranches as secured, higher yielding instruments that were backed by the American home owner. What better collateral could you get? The problem was that brokers were being paid to produce loans and Wall Street was being paid to create securities. However, because neither of them were holding the asset in their long term portfolio they weren’t concerned with credit quality. Hence the term “subprime” now enters the American Lexicon.
Tremendous amounts of capital in the market as well as lowered lending standards and a host of new products like interest only and LIBOR plus mortgages produced a typical reaction. To much money chasing to few houses resulted in an imbalance that was reflected in values. I can use our home town as an example. From 1990 to 2000 Burlington Home values rose from 1.24 billion to 1.58 billion or 27%. From 2000 to 2007 we went from 1.58 billion to 3.2 or over 100% in just 7 years.
The affect of cheap money and consumer driven buying can be seen in the equity markets as well. The Dow, after hitting a high of 11,000 in March 2000 struck a post 9/11 low of 7181 on October 10 of 2002. Almost 5 years to the day in on October 9, the Dow reached a high of 14,164 a little more than 1-year later we hit the current closing bottom of 7552 on November 20th.
The bloom began to come off the rose in late 2003 as the fed began to raise rates to bring a more realistic cost of money into the market place. By August 2005 they had completed 10 consecutive raises. But they weren't done. They completed 7 more raises and by June of 2006 The Fed Funds rate was now 5.25%. Just as they had overreacted and cut to much post 9/11, they now overreacted and raised to much and in fact inverted the yield curve.
An inverted yield curve means that long-term rates were lower than short terms rates. Long-term treasury yields showed that inflation was not a concern yet the Fed kept raising rates. An inverted yield curve has been a leading economic indicator in 5 of the last 6 recessions.
The rise in rates and in residential values coupled with energy costs resulted in a triple whammy for home owners. Affordable mortgages at a couple of percent now were less affordable as adjustable rates began to reset at much higher levels. Higher rates, rising property taxes and higher heating and utility costs and home owners began to feel the pinch. Those who began to have trouble found that their homes were now significantly under water. Again as an example I will use our own community. Three years ago we experienced a 25% tax increase on the residential sector not because of a rise in the budget but because of a significant shift in value.
Oil and gas prices significantly aggravated the general economy during this period and once again government was partially to blame. The war in Iraq affected prices but the real rise came from hurricane Katrina, unrest in Nigeria, Chinese and Indian demand and lastly the two most important elements were government buying and speculation in the markets. The Chinese, Americans, Germans and Japanese were all buying to fill their strategic reserves. Volume in contracts on the Nymex exchange increased by ten fold. This was primarily driven by the entry of hedge funds using commodities contracts for alternative investment classes. These contracts were previously used by people in the energy business to hedge prices for their inventories.
The first major crack in the financial system occurred last year when the auction rate market failed. This was followed by Bear Stearns and then the real thunderclap was when Lehman Brothers failed. The culprit was subprime mortgages and it wasn't long before Indy Mac, Fannie Mae and Freddie Mac and Washington Mutual have all followed suit.
The liquidity crisis became the new headline. Because values were falling so rapidly in these mortgages very few people had any confidence in them as collateral and were hesitant to lend against them. One example was a major brokerage house selling over 30 billion dollars of these securities. Pressed for cash to pay maturing bonds, they were only able to get a little over 6 billion for the bundle. The company sold off shortly there after.
That brings us to where we are today. The investment banking business in shambles if it even exists anymore. Once great franchises like Wachovia, Merrill Lynch, Citigroup, Morgan Stanley and Goldman Sacks have been sold or are continuing to sell assets.
The good news is we are first in and will probably be first out. The Europeans were slower to recognize the problem and have only recently begun to take action. The Fed is aggressively cutting rates again and pumping liquidity into the system. Unlike 1929 the government has acted quickly to prop up the banking system, and unlike 1990 most of the regional and community banks have avoided these problems.
We will recover from this just as we have recovered from other economic calamities in the past. It may take longer and it will probably get worse before it gets better. The stock market is a leading economic indicator and unemployment is a trailing one. We will be lucky if the nation stays under 9% and Massachusetts stays below 7.5%. One comforting aspect of this is that our adversaries are doing much worse.
The North Koreans may face threats of famine. Hugo Chavez will get quieter and quieter as oil continues to fall. Iran is facing a similar problem. With the fall in price of their principle export product and the corresponding impact on the domestic budgets, these guys will be more interested in staying in power than creating problems for the United States. In particular, Iran will have less money to fund a nuclear program or Hamas and Hezbollah.
One major international problem may result in China. The standard of living for the average Chinese has risen dramatically. The government compact with the Chinese people has been acceptance of rigid controls on personal freedom in exhange for economic gains. What will happen to the Chinese social fabric if extraordinary growth is replaced by rising levels of unemployment? The last time this happened resulted in the events of Tiannemen Square. Since that time many more Chinese have left the agrarian culture and emigrated to new cities. The New Year will certainly be a challenging one around the globe.
Let’s review some of the major events in our control and out of our control that have led us here.
The first major event contributing to our problem is the passage of Gramm Leach Blilely Act in 1999. This repealed the 1933 Depression era Glass Steagull act which had erected a wall between the lending of money and the investing or leverage of money. This came on the heels of the elimination of interstate banking restrictions in 1997.
The first activities post passage was the consolidation of banking, brokerage and insurance. This was illustrated most prominently by the combination of Citibank, Travelers insurance, Smith Barney and Saloman Brothers.
The next significant event was historically low interest rates. At the end of the century, rates stood at 6.25% and began to come down as the Fed was dealing with the bursting of the internet bubble. At the time of the attack on New York, rates stood at 3%. Six days after the attack on the towers the Fed cut 50 basis points and continued to cut until November of 2002 with rates hitting post WW2 lows of .75%.
What followed was a natural reaction to cheap money. Huge amounts of debt were issued throughout the US economy. Home owners increased credit card debt and accessed equity in their home, nonprofits went on building sprees, big business and municipalities floated bond issues. The states and federal government did as well.
A combination of cheap money and new Wall Street capital being available to the housing market spurred a real estate and housing boom not seen since 1990. Traditional lending criteria were now replaced by such things as structured investment vehicles (SIVS) namely collateralized debt obligations (CDO’s). Because of very low interest rates, the fixed income investment community was yield starved. Wall Street recognized this and began bundling mortgages into securities and selling them in tranches as secured, higher yielding instruments that were backed by the American home owner. What better collateral could you get? The problem was that brokers were being paid to produce loans and Wall Street was being paid to create securities. However, because neither of them were holding the asset in their long term portfolio they weren’t concerned with credit quality. Hence the term “subprime” now enters the American Lexicon.
Tremendous amounts of capital in the market as well as lowered lending standards and a host of new products like interest only and LIBOR plus mortgages produced a typical reaction. To much money chasing to few houses resulted in an imbalance that was reflected in values. I can use our home town as an example. From 1990 to 2000 Burlington Home values rose from 1.24 billion to 1.58 billion or 27%. From 2000 to 2007 we went from 1.58 billion to 3.2 or over 100% in just 7 years.
The affect of cheap money and consumer driven buying can be seen in the equity markets as well. The Dow, after hitting a high of 11,000 in March 2000 struck a post 9/11 low of 7181 on October 10 of 2002. Almost 5 years to the day in on October 9, the Dow reached a high of 14,164 a little more than 1-year later we hit the current closing bottom of 7552 on November 20th.
The bloom began to come off the rose in late 2003 as the fed began to raise rates to bring a more realistic cost of money into the market place. By August 2005 they had completed 10 consecutive raises. But they weren't done. They completed 7 more raises and by June of 2006 The Fed Funds rate was now 5.25%. Just as they had overreacted and cut to much post 9/11, they now overreacted and raised to much and in fact inverted the yield curve.
An inverted yield curve means that long-term rates were lower than short terms rates. Long-term treasury yields showed that inflation was not a concern yet the Fed kept raising rates. An inverted yield curve has been a leading economic indicator in 5 of the last 6 recessions.
The rise in rates and in residential values coupled with energy costs resulted in a triple whammy for home owners. Affordable mortgages at a couple of percent now were less affordable as adjustable rates began to reset at much higher levels. Higher rates, rising property taxes and higher heating and utility costs and home owners began to feel the pinch. Those who began to have trouble found that their homes were now significantly under water. Again as an example I will use our own community. Three years ago we experienced a 25% tax increase on the residential sector not because of a rise in the budget but because of a significant shift in value.
Oil and gas prices significantly aggravated the general economy during this period and once again government was partially to blame. The war in Iraq affected prices but the real rise came from hurricane Katrina, unrest in Nigeria, Chinese and Indian demand and lastly the two most important elements were government buying and speculation in the markets. The Chinese, Americans, Germans and Japanese were all buying to fill their strategic reserves. Volume in contracts on the Nymex exchange increased by ten fold. This was primarily driven by the entry of hedge funds using commodities contracts for alternative investment classes. These contracts were previously used by people in the energy business to hedge prices for their inventories.
The first major crack in the financial system occurred last year when the auction rate market failed. This was followed by Bear Stearns and then the real thunderclap was when Lehman Brothers failed. The culprit was subprime mortgages and it wasn't long before Indy Mac, Fannie Mae and Freddie Mac and Washington Mutual have all followed suit.
The liquidity crisis became the new headline. Because values were falling so rapidly in these mortgages very few people had any confidence in them as collateral and were hesitant to lend against them. One example was a major brokerage house selling over 30 billion dollars of these securities. Pressed for cash to pay maturing bonds, they were only able to get a little over 6 billion for the bundle. The company sold off shortly there after.
That brings us to where we are today. The investment banking business in shambles if it even exists anymore. Once great franchises like Wachovia, Merrill Lynch, Citigroup, Morgan Stanley and Goldman Sacks have been sold or are continuing to sell assets.
The good news is we are first in and will probably be first out. The Europeans were slower to recognize the problem and have only recently begun to take action. The Fed is aggressively cutting rates again and pumping liquidity into the system. Unlike 1929 the government has acted quickly to prop up the banking system, and unlike 1990 most of the regional and community banks have avoided these problems.
We will recover from this just as we have recovered from other economic calamities in the past. It may take longer and it will probably get worse before it gets better. The stock market is a leading economic indicator and unemployment is a trailing one. We will be lucky if the nation stays under 9% and Massachusetts stays below 7.5%. One comforting aspect of this is that our adversaries are doing much worse.
The North Koreans may face threats of famine. Hugo Chavez will get quieter and quieter as oil continues to fall. Iran is facing a similar problem. With the fall in price of their principle export product and the corresponding impact on the domestic budgets, these guys will be more interested in staying in power than creating problems for the United States. In particular, Iran will have less money to fund a nuclear program or Hamas and Hezbollah.
One major international problem may result in China. The standard of living for the average Chinese has risen dramatically. The government compact with the Chinese people has been acceptance of rigid controls on personal freedom in exhange for economic gains. What will happen to the Chinese social fabric if extraordinary growth is replaced by rising levels of unemployment? The last time this happened resulted in the events of Tiannemen Square. Since that time many more Chinese have left the agrarian culture and emigrated to new cities. The New Year will certainly be a challenging one around the globe.
Friday, December 12, 2008
How About a Little Sewerage with Your Flood?
The images you see are from about noon on December 12. The location is the main sewer lift station on Terrace Hall Ave. What is happening here is that after last nights heavy rain in the region, the system from Burlington down to the Boston sewer treatment plants was over loaded. This happens as a result of inflow, infiltration and now, in my view, under capacity.
Inflow is the result of illegal water drainage hookups to the sanitary sewer system. Infiltration results from Mother Nature's assault on the integrity of the system. Frost heaves and other general deterioration of the manholes and sewer line joints allows rain water into the system causing more water to go down to Boston. Under capacity is of course more and more building without attention to the need to have sufficient sewer capacity to deal with the new effluent flow.
When Burlington officials are notified that the system is over flowing in Woburn, they authorize the DPW to begin relieving that pressure by pumping raw sewerage directly out of the pipes and into the Vine Brook that runs adjacent to the pumping station (how convenient).
You will notice that there is neither chlorination equipment or a filtering mechanism on these pipes. Even though you can imagine what is going on here let me be blunt and describe it accurately. Toilet paper, condoms, feminine sanitary products and everything else that goes in the toilet is coming out of those pipes directly into the Vine Brook. The picture in the left hand corner is the over flowing brook into which this sewerage is being pumped.
The location is directly across the street from the pumping station and behind many buildings on Middlesex Turnpike. The brook flows from here down through the Sun Microsystems site into Bedford and finally into the Shawsheen River up stream of where we pump water from the river into our reservoir. Good idea huh?
Was today's storm an unusual one? Maybe, but it was certainly not of a long duration and it was not accompanied by any melting of a snow pack. Can you imagine how much more will have to be pumped if this happens in the spring?
We thought that this would be relieved with the addition of the Cummingsville connector down stream. It is apparent that it has not provided that expected relief. I am afraid that in the future this is again going to become a regular occurrence in Burlington.
Saturday, December 06, 2008
Why is it Good for Us?
This past Thursday night, the Planning Board put the brakes on the proposal to change the IG zoning district in town to a new designation of "office park." They did this despite the fact that a developer who was making a pitch for a zoning change to the not yet approved zone and curiously, the planning director both requested that the subject be put on the January warrant anyway for town meeting "just in case" the zoning proposal would be ready.
This action by the board seemed to surprise the applicants and their attorney but came not at all as a surprise to the most casual town observer. There are a number of things very questionable about these two simultaneous proposals which will take months if not years to sort out and are likely to involve many more people than just the planning director and the applicant.
How for instance did the planning director arrive at the conclusion that the IG district needs to be changed at all? And how did one applicant manage to arrange a full presentation and begin a public hearing process on a change of their zoning to the new designation before the planning board and the public at large had even begun to examine the new proposal?
Despite the fact that the zoning change proposal was continued to February, after town meeting, the developers still laid out their request. As usual it was filled with devspeak (developer speak) which we are all now wholly familiar with. They need 300,000 to 800,000 more square feet of hotel, retail and other amenities beyond what current zoning allows in order to attract high quality tenants here because their vacancy rate is 20%.
Haven't we heard all this before in other presentations? Wasn't the Lahey Clinic expansion, the Commons, previous hotels and expansions of the Mall supposed to attract high quality companies to the region? Wasn't the Sun, Oracle and Northwest Park changes sufficient to attract them? How about the petition to the legislature to raise the number of liquor licenses allowable in the community? Aren't those proposed amenities or the new already built high end restaurants enough?
The proposed project is with in several hundred yards of most of the existing amenities in town yet they need more? Some of the planning board members are beginning to ask the same questions that residents want answers to.
Perhaps it is not more square feet or faults in our zoning which is the answer to any problems. Perhaps questions should be asked such as would you have less vacancies if your rents were lower? Or isn't the real problem that the entire region has much more space than demand can fill? Or instead of telling us how this will help you, please explain in detail how it will help us? Why for instance in a community that has given tax breaks for development, those projects are delayed or on hold? Why is another new hotel necessary? How will new construction directly in the aquifer benefit the water supply?
Perhaps the planning director could expand on his comments regarding the new zone in helping Burlington "market itself." If we have almost 4 million square feet approved but unbuilt because of lack of demand, how will a new zone spur that demand?
These are just a few questions when in reality there are literally hundreds more at this point in our economic life as a community. Some of the most obvious ones are such as why is the same law firm telling us we need more space here and on the Landlocked parcel when they told us Northwest Park needed more space and yet that project is struggling to get off the ground? Will huge new amounts of space jeopardize the investment we have made there?
With the new zone proposal accompanied simultaneously with a new project proposal we blur the fact that any changes in the IG district will effect not only one park but also hundreds of other similarly IG zoned parcels through out the town. What impact will that have?
Most importantly is the impact on our revenue. According to the assessors tax rate history, the total commercial taxable value of the town in 1990 was $1,122,000,000, 17 years later in fiscal year 2007 that value had only risen to $1,361,000,000. This is a fundamental question that all members of the leadership in the community must begin to address. Why after all the development we have allowed has our taxable value increased such a paltry amount?
This proposed zoning designation change is one of the most far reaching revisions of our zoning in the past 25 years. This proposal is more significant than both the town center proposal and the yet uncompleted sign by law review. Both of those required several years of study by multi board participant study groups before any proposal was made or action taken.
We are at a historically significant economic crossroads in both our community and our nation. It would be foolhardy for us to move even another inch forward without having a full understanding of what impact the already enormous changes that we have approved will have on our residents. The first question that has to be asked and answered in explicit detail from now on is "why is it good for us? If not, then the new answer from now on is NO.
This action by the board seemed to surprise the applicants and their attorney but came not at all as a surprise to the most casual town observer. There are a number of things very questionable about these two simultaneous proposals which will take months if not years to sort out and are likely to involve many more people than just the planning director and the applicant.
How for instance did the planning director arrive at the conclusion that the IG district needs to be changed at all? And how did one applicant manage to arrange a full presentation and begin a public hearing process on a change of their zoning to the new designation before the planning board and the public at large had even begun to examine the new proposal?
Despite the fact that the zoning change proposal was continued to February, after town meeting, the developers still laid out their request. As usual it was filled with devspeak (developer speak) which we are all now wholly familiar with. They need 300,000 to 800,000 more square feet of hotel, retail and other amenities beyond what current zoning allows in order to attract high quality tenants here because their vacancy rate is 20%.
Haven't we heard all this before in other presentations? Wasn't the Lahey Clinic expansion, the Commons, previous hotels and expansions of the Mall supposed to attract high quality companies to the region? Wasn't the Sun, Oracle and Northwest Park changes sufficient to attract them? How about the petition to the legislature to raise the number of liquor licenses allowable in the community? Aren't those proposed amenities or the new already built high end restaurants enough?
The proposed project is with in several hundred yards of most of the existing amenities in town yet they need more? Some of the planning board members are beginning to ask the same questions that residents want answers to.
Perhaps it is not more square feet or faults in our zoning which is the answer to any problems. Perhaps questions should be asked such as would you have less vacancies if your rents were lower? Or isn't the real problem that the entire region has much more space than demand can fill? Or instead of telling us how this will help you, please explain in detail how it will help us? Why for instance in a community that has given tax breaks for development, those projects are delayed or on hold? Why is another new hotel necessary? How will new construction directly in the aquifer benefit the water supply?
Perhaps the planning director could expand on his comments regarding the new zone in helping Burlington "market itself." If we have almost 4 million square feet approved but unbuilt because of lack of demand, how will a new zone spur that demand?
These are just a few questions when in reality there are literally hundreds more at this point in our economic life as a community. Some of the most obvious ones are such as why is the same law firm telling us we need more space here and on the Landlocked parcel when they told us Northwest Park needed more space and yet that project is struggling to get off the ground? Will huge new amounts of space jeopardize the investment we have made there?
With the new zone proposal accompanied simultaneously with a new project proposal we blur the fact that any changes in the IG district will effect not only one park but also hundreds of other similarly IG zoned parcels through out the town. What impact will that have?
Most importantly is the impact on our revenue. According to the assessors tax rate history, the total commercial taxable value of the town in 1990 was $1,122,000,000, 17 years later in fiscal year 2007 that value had only risen to $1,361,000,000. This is a fundamental question that all members of the leadership in the community must begin to address. Why after all the development we have allowed has our taxable value increased such a paltry amount?
This proposed zoning designation change is one of the most far reaching revisions of our zoning in the past 25 years. This proposal is more significant than both the town center proposal and the yet uncompleted sign by law review. Both of those required several years of study by multi board participant study groups before any proposal was made or action taken.
We are at a historically significant economic crossroads in both our community and our nation. It would be foolhardy for us to move even another inch forward without having a full understanding of what impact the already enormous changes that we have approved will have on our residents. The first question that has to be asked and answered in explicit detail from now on is "why is it good for us? If not, then the new answer from now on is NO.
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